Tuesday, September 20, 2016

Some necessary information regarding the Fed raising, or not raising rates.

As I said, the Fed uses
communication as a transmission mechanism to affect rates. They didn’t have to do that in the past and
didn’t. The rate changes were not telegraphed
ahead of their arrival.

What changed is that they
can’t directly affect rates any longer.
This is because they used to affect market rates by adding or
subtracting reserves from the banking system.

They can’t do that now
because the excess reserves are $2.5 trillion dollars. They could add or subtract hundreds of
billions of dollars and it wouldn’t have any affect as it is too small of an
amount of money relative to the amount of reserves. They would have to drain a couple of trillion
dollars from reserves before they could again directly affect market
rates. Draining a couple of trillion
dollars out of the banking system would kill the U.S. economy. And the world economy.

All they have left is
talking up market rates so they can follow them up. And they desperately want to raise rates to force up inflation to create more wealth effect.